The proximate cause of the 4.2-percent budget deficit for 2012, which far
exceeded the 3% target, may have been slower-than-expected economic growth, but
experts are citing a more direct reason for the fiscal failure: Israel’s
two-year budget.

When Finance Minister Yuval Steinitz introduced the
two-year budget in 2010, he said the innovation would bring economic stability.
The thinking was that if the private sector knew what taxes to expect, if
government agencies knew what kinds of budgets they would be working with, if
people knew what chunk of their paychecks the government would get, and if the
Knesset could cut half of the budget haggling, everyone one win.

While
some politicians derided it, international onlookers from the IMF and OECD
praised the innovation.

According to Hebrew University Prof. Avi
Ben-Bassat, a senior fellow at the Israel Democracy Institute and scholar at
the Center for Academic Studies, Israel’s inability to predict long-term
economic conditions makes the budget disastrous.

“There is no other
country that has a dual-year budget. Why? Because it requires long
forecasts,” Ben-Bassat told The Jerusalem Post on Monday.

The predictions
for economic growth and tax collection for the past year’s budget were made
two-and-a-half years earlier, in the summer of 2010. Simply put, Ben-Bassat
says, “they were wrong. Very wrong.”

Ben-Bassat noted that
although Israel’s hearty growth started consistently declining in the second
quarter of 2011, the old estimates were not revised because of the inflexible
budget.

“It doesn’t make sense for policymakers to tie their own hands,”
he said. “The finance minister said he wanted to give certainty to the private
sector, but he provided just the opposite. It actually created
uncertainty.”

Prime Minister Binyamin Netanyahu on Monday downplayed the
significance of the deficit, saying it was only a fraction of a percentage point
away from more recent estimates.

“We had a deficit in 2009 also,”
Netanyahu said in a Channel 2 interview. “So what?” The prime minister also
responded to former prime minister Ehud Olmert’s recent accusation that
Netanyahu spent an unnecessary NIS 11 billion on the Iranian threat by saying he
was “proud” that the defense expenditures made Israel more secure.

Though
Netanyahu refused to lay out specific cuts for the 2013 budget despite being
pressed several times, he was steadfast on one point.

“I don’t want to
raise taxes,” he said. “I’ll do everything in my power to prevent
it.”

Ben-Bassat doesn’t make much of that promise. When asked if the
government would have to raise taxes after the election, he replied, “Certainly.
You can’t continue with such a large deficit. We have to get back down to 3%, so
we need another NIS 15b. or so.”

And unlike the prime minister,
Ben-Bassat has some concrete proposals.

In his view, the proportion of
deficit-cutting measures should be about two shekels in cuts for each one raised
in extra revenues.

But the tax burden is already too high, he said, so
new revenues must ensure tax hikes don’t hit the country’s growth or undermine
its weakest sectors.

“You cannot increase an individual’s income tax
because it’s high enough already,” he said.

“You can’t raise indirect
taxes [such as the value-added tax and sales tax] because they are very
regressive. The lower your income, the higher the burden is
percentage-wise.”

So who is left to tax? Well, said Ben-Bassat, there are
huge amounts of tax revenues – to the tune of NIS 39b., the exact size of the
2012 deficit – that are lost to exemptions.

“Part of the exemptions are
justifiable,” he said, “but some are just protectionist. They don’t accomplish
anything economic.”

Exporters, he said, are exempted from some NIS
10b. in taxes, paying a fraction of what others do. Half of that
exemption could be eliminated.

Another anomaly: Eilat is exempted from a
variety of taxes to encourage tourism, although many other tourist destinations
are not. Exemptions linked to outdated, poorly regulated study funds also could
bring in NIS 2.4b.

“You can solve the problem in a way that doesn’t hurt
so much,” he offered.

On the cutting side, Ben-Bassat expected that NIS
3b. could safely be cut from the defense budget, but saw the bigger fiscal
threat in haredi yeshivot.

“I have nothing against haredim,” he said,
“but I don’t think we need to support those who don’t want to work.” “The weight
of the haredi population is growing, and if we accept them not working, the GDP
per capita here will go down.”

Instead of monetary incentives not to
work, he said, the government needed to incentivize economic
productivity.

When asked what political party offered plans closest to
his, Ben-Bassat froze up.

“I’m exasperated from the campaigns and this
election,” he said. “I know what needs to be done, but I don’t know if it will
actually happen.”